As Reihan Salam argues, economic innovation is not just about basic research and technological breakthroughs. As Amar Bhide has said, “the willingness and ability of lower-level players to create new know-how and products is at least as important to an economy as the scientific and technological breakthroughs on which they rest”. History in fact provides us with at least two prominent examples where basic scientific research and invention did not translate into adequate economic innovation.
The first is the experience of the Soviet economic system. In The Soviet Union, most of the research and development was conducted by designated research institutes who were also partially responsible for implementing the new discoveries and inventions within the relevant industrial enterprise. The Soviets were reasonably successful in coming up with new inventions in their research institutes. Yet even when new products and technologies had been invented, the Soviet research institutes struggled to convince incumbent firms to introduce them into production.
Now how is this example relevant to a capitalist economy? Some of you may argue that unlike the communist enterprises in the Soviet Union, capitalist enterprises are strongly incentivised to jump upon any innovation that would come out of a research institute. But in reality there was no shortage of positive incentives to innovate or increase production for managers of Soviet enterprises. Soviet managers were not motivated by the communist ideal but by that most capitalist of incentives, the bonus. The economist Joseph Berliner estimated that a director of a coal-mine could earn as much as 150% of his base salary as a bonus just for outperforming plan production targets by 5%. On top of this, Soviet managers were provided with ‘innovation’ bonuses as the Soviet planning authorities became increasingly concerned with the slow pace of productivity growth in the 1950s and 60s. But none of these bonuses worked. In fact the bonuses served to further discourage the rollout of any risky innovation that could endanger the fulfilment of short-term plan targets. Managers would focus on low-risk process innovation to fulfil their innovation targets and focused on maximising their short-term ‘plan fulfillment’ bonuses. Ultimately the Soviet system could not replicate the real threat of failure that compels firms in a free enterprise economy to chase disruptive innovation for fear that an upstart new entrant may overtake them.
The second prominent example is the history of modern capitalism itself. Invention and scientific research are not what define the modern era of rapid growth that started in Britain in the early 19th century. As Jack Goldstone has argued, the technical innovations underpinning the “engine revolution” that England underwent in the early 19th century were present elsewhere. Countries like France were even widely regarded to be more advanced in the sciences than England. Yet it was in England that these innovations were so effectively put into economic use.
None of this is meant to undermine the importance of basic research funded by the government. But disruptive economic innovation also requires a truly competitive private sector where incumbents are faced with the threat of failure and barriers to entry for new firms are minimal. The ‘Great Stagnation’ is not driven by the lack of basic research and invention. It is driven by the lack of competition for incumbent large firms and the excessive barriers to entry that new firms and small businesses have to face in the neoliberal era.